A recent report from the United Nations Food and Agriculture Organization (FAO) indicates a sharp surge in global food prices. The World Food Price Index (FPI) for July 2021 is the highest since July 2011, according to the released data. This hike in food pricing can be attributed to various factors such as supply chain disruptions, worker shortages, extreme weather conditions, and growing costs.
Food and Fuel: An Interdependent Relationship
The mutual fluctuations in petroleum and agricultural commodity prices can be largely explained by their bio-fuels link. When crude prices escalate, the blending of ethanol derived from sugarcane and corn (maize) with petrol becomes more feasible. Furthermore, as corn is majorly used as animal feed, its diversion to ethanol leads to the replacement by other grains such as wheat for livestock use. Consequently, it triggers a rise in food grain prices.
The trend also applies to cotton, which becomes relatively cheaper compared to petrochemical-based synthetic fibres when petroleum prices rise. Similarly, enhanced demand for alcohol production leads sugar mills to increase the ratio of crushed cane for fermentation into alcohol, thus driving up sugar prices.
Economic Activity and Market Sentiment
Market sentiment underpins two crucial aspects. Firstly, demand resurgence associated with global economic revival amidst declining Covid-19 cases and escalating vaccination rates. Secondly, the cash influx by the U.S Federal Reserve and various global central banks to curtail the economic devastation unleashed by the pandemic.
However, the slow-paced restoration of supply chains has failed to match up with demand recovery, causing inflation. Symptoms of this mismatch include congestion at ports, the scarcity of shipping containers or vessels, and laborers yet to resume full-time work in plantations.
Impact on Farmers
The situation is perceived differently by farmers. Certain agricultural products such as Kapas (raw unginned cotton) and Soyabean are selling at prices notably above the government’s Minimum Support Price (MSP). However, farmers are also bearing higher costs for fuel and fertilizers in line with their increased international prices.
Fertilizers: A Hard Hit
Fertilizer prices, in particular, have seen a steep rise. Di-Ammonium Phosphate (DAP) is currently being imported into India at USD 800 per tonne, including cost and ocean freight. Similarly, Muriate of Potash (MOP) is available for nothing less than USD 450 a tonne. These prices match those during the world food crisis of 2007-08.
Prices of fertilizer intermediates and raw materials like rock phosphate, sulphur, phosphoric acid, and ammonia have also soared due to increased crop plantings (demand-pull) and rising oil and gas prices (cost-push).
Food Price Index: An Overview
The Food Price Index (FPI) was introduced by FAO in 1996 to monitor developments in global agricultural commodity markets. The Index tracks the monthly changes in international prices of a food commodity basket consisting of cereals, oilseeds, dairy products, meat, and sugar. The base period for FPI is 2014-16.